DARLING INGREDIENTS INC. annual report, FY2021

Darling Ingredients Inc. — Fiscal 2021 Form 10-K Summary

Reporting period: The supplied filing is the Form 10-K for the 52 weeks ended January 1, 2022, not a 2020 Q4 filing. Fiscal 2020 covered 53 weeks ended January 2, 2021. Darling is a global producer of sustainable ingredients from animal by-products, used cooking oil, bakery residuals and other bio-nutrients, operating across five continents in Feed Ingredients, Food Ingredients and Fuel Ingredients.

Key Financial Metrics

Metric	Fiscal 2021	Fiscal 2020	Change
Net sales	$4.741 billion	$3.572 billion	+32.8%
Operating income	$884.5 million	$430.9 million	+105.3%
Net income attributable to Darling	$650.9 million	$296.8 million	+119.3%
Diluted EPS	$3.90	$1.78	+119.1%
Adjusted EBITDA	$851.4 million	$504.2 million	+68.9%
Operating cash flow	$704.4 million	$624.7 million	+12.8%
Capital expenditures	$274.1 million	$280.1 million	-2.1%
Gross margin	26.2%	24.7%	+150 bps
Income tax expense	$164.1 million	$53.3 million	+208.0%

Segment Performance

Feed Ingredients: Sales increased to $3.040 billion from $2.072 billion, while operating income rose to $394.8 million from $96.6 million. Gross margin improved to 27.4% from 25.5%, principally because of higher fat and protein prices. Raw material volume declined approximately 0.3% to 8.92 million metric tons.
Food Ingredients: Sales increased to $1.272 billion from $1.186 billion and operating income rose to $134.0 million from $83.4 million. Gross margin increased to 23.0% from 22.4%. Raw material volume increased approximately 2.8% to 1.11 million metric tons.
Fuel Ingredients: Sales increased to $430.2 million from $314.1 million and operating income rose to $425.1 million from $317.3 million. Results benefited from the Diamond Green Diesel expansion, higher renewable identification number prices and higher renewable diesel prices. Gross margin excluding DGD declined to 27.0% from 28.8% because of higher European raw material costs.

Liquidity, Debt and Capital Resources

Year-end unrestricted cash was $68.9 million, compared with $81.6 million at January 2, 2021. Working capital was $336.3 million, with a current ratio of 1.45 to 1.
Total debt reported on the balance sheet was approximately $1.463 billion before current maturities and deferred loan costs. Principal debt included $500 million of 5.25% senior notes due 2027, €515 million of 3.625% senior notes due 2026, $200 million of Term Loan B and $160 million drawn under the revolving facility.
Revolving facility availability was $1.286 billion, and an additional $400 million delayed-draw Term A commitment was available. Management stated that the Company was in compliance with its financial and other debt covenants.
Fiscal 2021 investing cash outflows included $189.0 million invested in DGD and a $25.0 million loan to DGD. Financing cash outflows included $167.7 million of share repurchases and $46.9 million of minimum withholding taxes on equity awards.
Management expects approximately $339 million of fiscal 2022 capital expenditures, including construction, compliance and expansion projects, to be funded with operating cash flow.
The Company has not paid a common-stock dividend since 1989 and does not expect to pay a cash dividend in 2022.

Material Changes and Unusual Items

Fiscal 2020 included an additional operating week that increased sales by approximately $73 million and operating income by approximately $8 million; this affects year-over-year comparability.
Diamond Green Diesel completed a $1.1 billion Norco expansion in October 2021, increasing renewable diesel capacity by 410 million gallons annually to 700 million gallons. Darling recorded $351.6 million of equity income from DGD, up from $315.1 million.
DGD recorded approximately $371.2 million of blenders tax credits in fiscal 2021; Darling’s economic share was 50%. Changes to renewable fuel mandates, tax credits or low-carbon fuel programs could materially affect results.
Darling announced a proposed $1.1 billion cash acquisition of Valley Proteins, subject to customary closing conditions and regulatory approval.
Construction continued on DGD’s Port Arthur facility, expected to begin operations in the first quarter of 2023. Estimated project cost is approximately $1.45 billion, with expected total DGD renewable diesel capacity of approximately 1.2 billion gallons annually after completion.
COVID-19 did not materially affect operations, although the Company incurred approximately $3.1 million of COVID-related charges in fiscal 2021, compared with $7.5 million in fiscal 2020.
Fiscal 2021 restructuring and asset impairment charges were $0.8 million, compared with $38.2 million in fiscal 2020, primarily reflecting the shutdown of U.S. and Canadian biodiesel processing operations.
The Company repurchased approximately $167.7 million of common stock during fiscal 2021 and had approximately $500 million remaining under its repurchase authorization at year-end.

Outlook, Risks and Contingencies

The Company does not provide forward-looking financial or operating estimates because results are highly sensitive to commodity prices, energy costs, weather, raw material availability, government policies and foreign exchange rates. Management believes cash flow, cash on hand and available credit should fund working capital, scheduled debt service, taxes and planned maintenance and compliance expenditures for the next twelve months.

Key operating risks include volatility in prices for fats, proteins, oils and competing commodities; competition for animal by-products and used cooking oil; dependence on major suppliers and customers; and higher natural gas, diesel and electricity costs.
DGD earnings depend materially on renewable fuel mandates, tax credits, RIN and low-carbon fuel prices, feedstock costs, plant performance and successful completion of the Port Arthur project.
The top ten finished-product customers represented approximately 31% of product sales, and the top ten raw-material suppliers represented approximately 25% of raw-material supply. DGD accounted for approximately 11% of consolidated net sales.
Goodwill was approximately $1.2 billion at year-end. Management’s qualitative impairment assessment concluded that reporting-unit fair values exceeded carrying values, but future commodity-price declines or weaker operating performance could result in impairment.
Insurance, environmental, litigation and tax contingency reserves totaled approximately $78.4 million, offset by $31.8 million of insurance recovery receivables. The Company believes additional liability from known claims is unlikely to materially affect financial position, results or cash flow.
The Lower Passaic River matter remains unresolved. Darling accepted a $0.6 million EPA cash-out settlement for certain claims, but its ultimate liability, if any, for related investigatory, remedial or natural-resource damages cannot be determined.
DGD guarantees include up to $50 million related to IMTT terminaling agreements and up to approximately $160 million related to GT Logistics terminaling agreements; no liability was recorded because management considers payment remote.

Investor Verification Checklist

Confirm that the intended period is fiscal 2021 ended January 1, 2022 rather than 2020 Q4.
Review the quality and sustainability of earnings, particularly the contribution from elevated commodity prices, DGD tax credits, RIN prices and renewable diesel prices.
Assess DGD’s capital funding needs, debt, guarantees, feedstock arrangements and the timing, cost and expected returns of the Port Arthur project.
Evaluate the proposed $1.1 billion Valley Proteins acquisition, including regulatory approval, financing and expected synergies.
Reconcile reported net income and operating cash flow with non-GAAP Adjusted EBITDA and consider the effect of DGD’s limited fiscal 2021 cash distributions.
Review debt maturities, variable-rate exposure, covenant compliance and the Company’s ability to fund approximately $339 million of planned 2022 capital expenditures.
Monitor commodity prices, raw-material volumes, energy costs, foreign exchange, animal disease, weather and renewable-fuel regulation.
Review environmental, litigation, pension and multiemployer-plan exposures, including the Lower Passaic River matter and potential unfunded withdrawal liabilities.